Renewable energy in Taiwan

Renewable Energy in Taiwan

From a position of having a relatively low profile in the regional and international renewable energy community, Taiwan has fast become
a focus of developers, investors and others as it seeks to pursue an ambitious agenda of rebalancing its energy mix away from largely
imported fossil fuels and towards home grown wind, solar, hydro and other renewable energy sources.

The key driver of this is the government’s decision to phase out nuclear power (which currently accounts for approximately 10% of
Taiwan’s installed generation capacity) as well as to reduce its reliance on imported coal.

Taiwan’s geographical characteristics and relatively friendly investment environment make it a particularly attractive target for inbound
investment from foreign investors.

In particular, the recent award of 5.5GW of grid capacity to new offshore wind projects is expected to result in a high level of activity
for this market in the coming years. The successful financing in June 2018 of the 128MW Formosa 1 project, Taiwan’s first utility-scale
offshore wind farm, demonstrates the appetite of the local and international bank market to provide long term project finance for offshore
wind projects in Taiwan.

Taiwan’s gross energy production was 270,278.7GWh in 2017.1
Taiwan’s main source of energy is thermal power with coal, nuclear
and gas (including LNG) representing the most important sources
of fuel in the island’s energy mix. The composition of installed
generation capacity as of 2017 is as follows:

In 2016, the government announced that, by 2025, it would
phase out nuclear power generation. To plug this energy gap,
the government announced ambitious targets to increase the
amount of electricity generated from renewable sources to
20% of the island’s energy supply.

The composition of Taiwan’s renewable energy generation
capacity as of 2017 is as follows:

The government aims to achieve the increase in renewable
generation by developing the following sources of renewable
energy generation capacity:

Solar: 20GW by 2025

Offshore wind: 5.5GW by 2025 (see below)

Onshore wind: 1.2GW by 2020

To support the development of renewable energy the government
in 2009 passed the Renewable Energy Development Act
(“REDA”) which provides for a feed-in tariff system (see further
details below) and offers a range of incentives to renewable
power producers. The REDA is currently under an amendment
process in the legislative yuan (legislative assembly).

The Electricity Business Act (the “EB Act”) was also subject to
substantial reform in 2017, including provision for the future
liberalisation of the electricity market but also addressing the
development of renewable energy by providing for preferential
measures for renewable power producers, such as priority grid
connection and dispatch. Further regulatory changes have
sought to facilitate the expansion of the offshore wind sector
in Taiwan, such as incentives and subsidies, land, zoning and
construction arrangements.

As well as legislative and regulatory measures, the government
has also announced measures to streamline approval processes
and significant investment in infrastructure designed to facilitate
the development of renewable energy – such as the expansion
of Taichung Port as a base for the development of the offshore
wind sector.

Role of Taipower

Taiwan Power Generation Company, commonly referred to
as Taipower ("台電"), is the state-owned company under the
control of the Ministry of Economic Affairs (“MOEA”). Taipower
is the main energy producer in Taiwan and currently has a legal
monopoly on the distribution and sale of electricity. Commercial
private power producers are currently required to enter into a
power purchase agreement (“PPA”) with Taipower, although the
recent amendments to the EB Act provide for:

the liberalisation of Taipower’s monopoly over the purchase of
all electricity generation in Taiwan and paves the way to direct
sales of electricity by renewable power producers to end-users;

the unbundling of Taipower’s electricity generation business
and its transmission / distribution business; and

the establishment of a ‘transmission wheeling’ service by
Taipower to access the grid

Regulatory bodies

MOEA responsibilities include setting the policies for electricity
businesses and the power prices / charges, setting technical
regulations and overseeing the administration of electricity
facilities. The MOEA’s energy-related functions are delegated to
the Bureau of Energy (“BOE”).

Local authorities’ responsibilities include the inspection of
users’ electrical equipment, overseeing the administration of the
electricity construction industry and managing disputes between
electricity enterprises and the public on the use of land.

The Electricity Regulatory Agency is a new regulatory agency
to be designated by the MOEA pursuant to the EB Act, which
will be responsible for (among other things) supervising
and administrating electricity enterprises and the electricity
market, approving applications for the set-up of electricity
enterprises, predicting and planning power supply and demand,
supervising and administrating power dispatch and settling
disputes between electricity enterprises or between electricity
enterprises and users. Before the Electricity Regulatory Agency
is established, its functions will be exercised by the MOEA.

The Fair Trade Commission is an independent agency
which oversees competition and fair trade matters, including
anticompetitive behaviour in the power sector.

Permitting regime

The permitting process for the development of renewables
projects in Taiwan can be relatively complex and involve
various authorities including the Environmental Protection
Administration, MOEA, BOE, Taipower, local governments and
other government agencies.

For example, an offshore wind project will require:

an EIA Approval;

an Establishment Permit;

a Recordation Approval;

entry into a PPA (see Hot topics);

a Work Permit; and

an Electricity Business Licence.

As well as a number of other consents and approvals.

Renewable energy is purchased by Taipower according to feed-in
tariffs determined by the government (see below). In addition,
the recent amendments to the EB Act provides other incentives
to renewable IPPs, including:

subsidy programmes (such as equipment subsidies and
demonstration subsidies) and the establishment of a specific
fund to finance such subsidies. The fund is financed by power
producers in proportion to their non-renewable electricity
generation capacity;

exemption from import duties for renewable power equipment
during construction or operation (provided there is no
manufacturer for such equipment in Taiwan); and

various rights and arrangements for renewable IPPs in relation
to zoning and construction regulations.

Feed-in tariffs

Feed-in tariffs (“FiTs”) for wind, solar, hydropower, biomass and
waste are set in New Taiwanese Dollars (“NTD”) on a yearly basis
by the MOEA pursuant to the EB Act and the REDA. The REDA
provides that the purchase price for renewable energy must not
be lower than the average cost for domestic fossil fuel power
production.

Once fixed, the FiTs for each category of renewable energy
are published by the MOEA through a tariff notice. PPAs for
renewable energy are entered into with Taipower (as grid
operator) for 20 years based on the relevant FiT contained in
the applicable tariff notice at such time. Depending on the type
of energy, different pricing options may be available under the
relevant tariff notice.

A summary of the FiTs for renewable energy applicable for the
calendar year 2018 is set out below.9 The FiTs for 2019 are
expected to be announced at the end of October 2018.

Type of Renewable Energy

FiT (NTD/ kWh)

Onshore wind

2.7315 to 8.6685 (depending on capacity)

Offshore wind

5.849 (or 7.1177 for the first period of ten years and 3.5685 for the second period of 10 years)

Solar photovoltaic

4.2429 to 5.8744 (depending on technology, capacity and location)

Run-of-the-river Hydroelectricity

2.7988

Geothermal Energy

5.1956 (or 6.1710 for the first period of 10 years and 3.5685 for the second period of 10 years)

Biomass Energy

2.5765 to 5.0161 (depending on technology)

Waste

3.8945

Funding of the FiT

The ‘RED Fund’ was established 2009 to support renewable
power generation, including by subsidising renewable energy
tariffs. This is funded by conventional power producers,
Government treasury contributions and other sources. While the
RED Fund is available to fund the FiT, the primary obligation for
payment of the FiT sits with Taipower.

The proposed amendments to the REDA include changes to the
use of the RED Fund. It is anticipated that, in the future, the RED
Fund may no longer be available to subsidise renewable energy
tariffs, and Taipower will instead be allowed to pass on the cost of
renewable energy to end-users.

There are generally no restrictions on foreign investment in the
renewables sector in Taiwan (except for investment with national
security concerns or investment from mainland China). Taiwan
operates a “negative list” control on investments by foreign
nationals whereby investments are allowed unless they are
restricted or prohibited. Electricity generation is not subject to
specific restrictions, although foreign investors are required to
undergo an application process and obtain a foreign investment
permit from the Investment Commission of the MOEA. The grant
of a foreign investment permit also entitles foreign investors to
certain fundamental investor protections including in relation to
adverse government action.

2018 capacity allocations for offshore wind

In early 2018, the MOEA released the “Directions for Allocating
Installed Capacity of Offshore Wind Potential Zones” (the
“Allocation Directions”) which provided for a selection and
bidding process for the allocation of 5.5GW of grid capacity
to offshore wind projects which obtained approval of an
Environmental Impact Assessment by the end of 2017.

The Allocation Directions provided for:

a selection procedure for the award of fixed FiTs for:

> a total capacity of 0.5GW for grid connection in 2020 (Tier 1
or ‘fast track’ projects); and

> a total capacity of 3GW for grid connection between 2021
and 2024 (Tier 2 projects); and

a selection and bidding procedure for the award of a
competitively determined tariff, for a total capacity of up to
2GW (Tier 3 projects).

The MOEA awarded a total of 3,836MW of grid capacity through
the selection process (Tier 1 and Tier 2 above) in April 2018,
and subsequently awarded 1,664MW of grid capacity through
the bidding process (Tier 3 above) in June 2018. A full list of the
projects that were allocated capacity in the selection process and
the bidding process can be found on the MOEA website.

The tariff applicable to the Tier 1 and Tier 2 projects will be the
FiT applicable to offshore wind at the time the relevant project
enters into the PPA with Taipower, whereas the tariff applicable
to the Tier 3 projects were determined by competitive auction
and are significantly lower than the current fixed FiT for offshore
wind. There are also differences in the terms of the Grid Contract
applicable to each of Tiers 1, 2 and 3 (see below).

Grid Contract

All projects awarded capacity pursuant to the Allocation
Directions are required to comply with the requirements set out
in a grid contract (“Grid Contract”) to be entered into with the
MOEA. The form of Grid Contract will be different for each of
Tiers 1, 2 and 3 and will address (among other things):

lock-in of ‘promoters’ originally awarded grid connection and
FiT for the term of the PPA; and

other secondary and ancillary obligations.

Projects will also be bound by the terms of the original selection
proposals submitted to MOEA.

Offshore wind PPA

The model form of PPA that is used by Taipower for offshore
wind projects regulates:

the purchase of electricity by Taipower; and

the connection of offshore wind projects to Taipower’s
electricity grid.

It is a short document which does not seek to provide a
comprehensive allocation of risks as between the generator
and Taipower / government (as would be the case under a
typical long form emerging markets "PPA"). Instead, it is more
analogous to a prescribed statutory PPA used in the context of
a feed-in-tariff model in developed and/or liberalised markets,
and should be read in conjunction with the applicable regulatory
regime in Taiwan.

The model PPA for offshore wind was updated by Taipower in
December 2017 and is in a very similar form to the template
form of PPA used in numerous existing onshore wind and solar
projects in Taiwan.

Development Assistance Fund

The MOEA announced in February 2018 draft Rules on the
Usage, Supervision and Management of Power Development
Assistance Funds, which require projects to make contributions
(based on electricity generated) to the ‘Power Development
Assistance Fund’. The Fund will be used mainly to promote local
community development and welfare.

Solar power

The government intends to achieve 20GW of solar PV installed
capacity by 2025 through the development of both rooftop and
ground-mounted systems, which are expected to respectively
account for 3GW and 17GW.13 There have also been examples of
floating solar technology uses.

In September 2016, the government approved a “Solar PV
Two-Year Promotion Project” targeting to achieve 1.52GW of
additional solar power generation within a two-year period. Under
this plan, the government was to:

create a “single-window” system to speed up administrative
procedures

designate further locations for solar power generation

plan for grid expansion

encourage domestic banks to provide financing

amend laws and regulations to reduce regulatory restrictions
on the development of solar power production.

The government is also encouraging the development of small
scale capacity through the “Million Rooftop PVs Program”.

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